Understanding Exchange Rates

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Do you need to understand foreign exchange rates? If you travel on a regular basis, either for business or for pleasure, it’s important to have at least a basic grasp of how foreign currency works. Unsurprisingly, few of us even understand the meaning of an exchange rate!

Back to Basics with Overseas Currency

In finance, the ‘exchange-rate’ can also be known as the Forex-rate or the FX-rate. In simple terms, exchange rates help us work out the difference between two currencies, one against the other. FX rates are used when companies trade with other countries, when consumers purchase goods from overseas, and when holiday makers want to visit other countries. The ‘spot’ exchange rate is known as the most current, as FX rates will fluctuate from day to day, hour to hour, and sometimes minute to minute. Although the differences are always minor, when you exchange a large amount of cash, it can add up.

Over time, a better understanding of currency in other countries can help you save money. The foreign exchange market is one of the largest in the entire world and roughly 3.2 trillion US dollars change hands across the world on a daily basis.

Exchange Rates and Quotations

Exchange rates can come in a direct quotation, indirect quotation or a cross exchange-rate.
•Direct quotations will take the price of each foreign currency unit, expressing it in terms of the home currency. e.g. €1 = 87p
•Indirect quotations are a product of direct exchange rates, so each home currency unit is expressed in the foreign unit. e.g. £1 = €1.23
•Cross exchange rates deliver the value of one foreign unit within another, so this does not include home currency. €1 = $1.29

Is It Important to Understand the Market?

Nothing ever stays the same in the foreign-exchange market, and market based rates will change with demand, availability and supply. For instance, when demand is high, this can increase exchange rates or increase the speculative demand for money. This all affects the end user – the consumer, the business, the holiday maker and the shopper. Whether you use overseas transactions through your bank or you are a keen traveller, understanding exchange rates and the money market can help you cut back on unnecessary spending.

You do not need to undertand the market. The market is always changing and there is nothing you or we can do about it. What we can do is try and make all this as simple as we can. Each currency supplier sets their own price that they want to sell you any particular currency. They call this the exchange rate but in truth it is just an offer to sell you currency you want to buy. Suppliers either set a really competitive price to attract more sales or a poor price to make more money per order. Every business has it’s own overheads and the expenses and this means that some of the smaller and online suppliers can afford to offer far better deals than some of the international suppliers.

Have a look at our comparison tables and have an open mind. Almost all the providers have reviews left by real customers. Have a read and make up your own mind.

Posted by Peter Rudin-Burgess

Peter Rudin-Burgess

Peter is one of the founding partners for both Compare Holiday Money and Currency Buy Back. He regularly blogs on financial matters and writes content for a number of blogs in the travel industry.

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